Quote:
Originally Posted by Sliver
I swear I took econ in university, but I honestly don't understand how this #### works. Anybody have a very basic explanation of what all this means?
Interest rates go up. People spend less, I assume? Then what? I don't get any of it, TBH.
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Imagine a guy with a $300K HELOC. In 2021 he'd be paying $7.5K interest on that per year. Now he'd be paying $21K in interest a year. So that's $13.5K in his disposable income that used the be spent on goods/services that's now getting diverted to interest payments. So maybe instead of buying a new car, renovating his house, or taking a vacation, he holds off for a while because of that. That reduced demand for goods/services will tend to soften prices in the aggregate.
And beyond that, higher rates also incentivize saving and paying down debt. When borrowed money was basically free and savings accounts were paying 0.1% interest, you might as well spend the money. But now that you can get 5% guaranteed returns and debt is expensive, more money will move from chasing goods/services into savings and debt repayment.